When given a free option you either.....

Sell it or use it! This was one of the most fundamental lessons ever given to me by my former boss in Swiss Bank Corp, Mr. BJ..........(Mind you I have failed to exercise quit a few times in my life despite this insight!)

The US govenrment have now given the ABS market a free option : http://tinyurl.com/62gg2h

Buy these issues - if it fails(lose you money) just give it back to the US Government, or rather Fed - it also... the lessons goes.... implies quantitative easing!

Wow, easing in near depression environment? - What a surprise!!!!!! I must say I am tired, extremely tired of this game of mouse and cat.

You know, I know, this is one big Ponzi scheme - and the game right now is to figure out who can stay solvent the longest. The US government got some cards on their hands being able as always to "print themselves" out of the trouble.

The risk being this time, it's a global crisis, it's not only global it's also the biggest uphill struggle in history with debt remaining at all time high 340 pct of GDP... so now.. if moving ABS debt from one pocket to the other is big "feel good" factor then my bank advisor should just move my overdraft from one account to the other - at least one of them will improve!

Feel free to buy this rally, even feeel free to cheer on the new O-regime with their Dirigisme.

I for one is tired of being the "warning signal" for this market but please free me from talk of this market being cheap, having seen the low, and please stop producing "counting" documentation for why this market is now going up 1000 pct!

I do not want it! - I am 75% in cash,yes...... seventy-five percent C A S H ! - and if anything I am likely to increase this cash ratio as I see nothing but utter disrespect for the forces of the market and a total lack of willingness to understand all these "help programs"... and the junk yard they all lead to.

My good friend Drew Baptiste have given me his new outlook on stocks which sort of mimicks my amateur levels: (Below is his and mine combined - sorry Drew!)

S&P could move into broad 650.00 - 1050.00 range - for now 905.00/900.00 is upside to break (S&P now @ 848.00) - downside still got some attraction before downside established for now....720/680/650 our new medium targets and long-term now 2009 we will see S&P 500 in 500.

For the mighty EUR/USD I still, alone it seems, feel Europe not priced correctly - The US Dollar has horrible outlook but at least they have done something - and with new Prez O from January there will massive fiscal stimulus - meanwhile in Lalaland- sorry Euroland - Trichet is about to publicly acknowledge things have slowed!

All core Europe rates will go to ZERO, ZILST, NOTHING in 2009 - the sooner the better - implying massive yield steepning........ but the EURUSD will neeed to pay the price and for me 0.9500 EURUSD is more than likely - just not this week ;-)

Talking about something I do like from long side, I remain positive on selective corporate credit - in the refinancing period between now and middle of next year there will be so much dislocation that VALUE DEALS will materialise......it is time to start new VULTURE FUND in Corporate Credit space.

I also maintain overweight Japan - versus short Europe - The Japanese have been in "recesison" the last 20 years - they know what to do AND they got the saving surplus to deal with it.

It is also time to look at inflation linked products - whether selective REIT or direct in TIPS - this explosive creation of money will have inflationary impact but delayed as the REAL ECONOMY for now will be bigger drag, but rest assure where there is ACTION there will be REACTION (= inflation) down the line.....

We are:

Short EURUSD (still), short EURGBP @ .851932, long bunds @ 120.50, short S&P(still)m small long JPY.... and just taking opportunistic view on everything.

Safe trading,

Steen

Weekly Macro Meeting

The three driving premises for our research remains:

1. Cost of funding drives market and valuations


2. Price of liquidity new unknown (tax on money)


3. No prior analogy historically will work (because this is different, very different)

Conclusion

This week: Reality hurts! Redemption, Dirigisme, tension in EMG+ EEC all points to further deleveraging in the economy ==> Bias on ACCELERATION on downside for risk assets

Last week: We have moved into grey-zone between recession and depression ==> Bias on downside is increasing.

Allocations:

This week: 85% cash maintained - short in commodity direct and indirect through stocks, short gold, long TIPS, Bunds,long USD,JPY,CHF vs EUR, LVL, HUF, GBP, long down-side in Stoxx50 and S&P500

Last week: We called the transition - although the Social democratic Nationalisation has created pressure in EEC and EMG countries as they stand outside the "circling of the wagons".
We maintain 85% cash - but up from intraweek 65% - as we need further information to make long-term call.

Targets:
S&P 500: Down to test our long-term minimum target of <765-00>

Fed funds: 0.50% by Q2 2009 /ECB: 1.50% by Q2 2009 /10y yield: 4.5-5.0% by Q2 2009 /2y yield: 1.00% by Q2 2009

Crude: 50-60 by Q1 2009 /Gold: 700 by Q1 2009 =========================================================

Economics

Bias: Negative growth, consumer demand & inflation

Incoming data continues to disappoint- below is the Surprise Index compiled by Citigroup, it rates better than expected data in ratio to worse than - not exactly time to smile is it?

(Click on chart for larger version)

We see increased tensions in the Non-in regions: EMG and EEC.

Hungary is being called the new Iceland, and Argentina is threathning to nationalise the pension funds......

EMG+EEC return is 100% correlated to their current account surplus' - in this global slow-down C/A balance deteriate and does the political will of these emerging countries to maintain "open trade" and non-intervention.....unfortunately.

On the premise of "cost of capital" key component, the saving surplus countries: Switzerland, Singapore, China and Japan will do "less bad" than overleveraged: EEC+EMG, UK, P.I.G.S, Canada, Australia and New Zealand.

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Fixed Income

Bias: Bullish

Change in bias from neutral last week - we have been long Bunds the past week and with some success we see further flight to quality.

High Yield(Ticker: HYG) has performed ok - we are still constructive on this.

Danish Mortgages: Still under pressure - as long as the Government dont guarantee mortgages there will be pressure on DKK & Mortgage Bonds. We see intervention timed with the "conversion" in December - The government does not know this yet, but they will intervene before going on Christmast Break.

Still favour Bunds over Treausury. In cash bonds we favor New Zealand, UK and Austalia - currency hedged.

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Equity

Bias: Very negative

Our long-term EPS share model indicates we need to undershoot by wide margin on "cheapness" in order to follow standard mean-reversion. Our Chief Economist is all excited about potential for S&P in 400.00 as an analogy to The Great Depression where S&P fell 80% from peak, but unfortunately we are not in position to use this type of counting due to our rule #3: No prior analogy historically will work (because this is different, very different)- However this does not mean David is not right about deteriation beyond our minimum target of 765.00

Sectors wise:

Negative: Energy, Consumer Discretion(..but Fiscal Stimulus plan could change this), Materials

Positive: Financials(The National Champions), Utilities, and Technology

Neutral: Consumer staples, health care, Industrials, Telecom

Top picks: Credit Suisse, HSBC, Microsoft

Top pans: Carlsberg, Nestle, British American Tobacco, Coke, Volkswagen

=========================================================

Commodities

Bias: Negative

Gold: In time of writing we have passed our last week minimum target of 750.00 - new target: 700.00. The Central Banks sits on big Gold reserves which pays nothing, does not offer any value ==> They will sell - also correlation with US dollar will accelerate the move.

Crude: Passed the critical 70.00 US Dollar. OPEC this week will take 2 mio. barrels out of circulation - but pressure will continue.

Foreign Exchange

Bias: Stronger US Dollar and risk aversion currencies: CHF, JPY

US Dollar: The fiscal package mentioning this week took US Dollar through the critical 1.3250 level, we have been short from 1.3700 and we are now close to our target of 1.2700.

The key drivers in US dollar for now are:

Dirigisme, the relative more leveraged European banks, and differences in monetary policy expectations - all indicates that down the line 1.10-1.15 could be likely.

EMG, EEC: Very very negative. We are looking for strain in ALL pegged currencies and EEC+EMG. Hungary been hiking rates 300 bps - this smells like UK & Ireland in 1992 hiking to defend, but how is that going to do anything about their structural imbalances? You need to be long CHF, USD, JPY basket vs EMG+ EEC

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OVERALL CONCLUSION

=========================================================

Our Puma Macro model made +123 bps versus Dax return of -1208 bps for the last week - and YTD we are +510 bps versus -43% for DAX .

We fully acknowledge being so extremely defensive dictates being open for any change of trend, but having said that in a world of almost total uncertainty the old rules of Money Management needs to be applied:

1. Preservation of capital

2. Respect and understand compounding

3. Knowing when you are wrong.....

I wish that more socalled advisors would have learned these lessons:

I now daily see "Conservative Portfolios" down 70% and where the standard reply from the "managers" continues to be: Keep calm, this will come back...... but as John Maynard Keynes (keeping with the theme of dirigisme) said: 'The market can stay irrational longer than you can stay solvent'

We are now in phase where people/investors face the most difficult task of all: Remaining solvent - the advice they get is to "stay with your positions - it will come back", but scroll back up to the top of this blog and read our # 3 rule again: It is different this time - negatively.

Safe trading,

Steen Jakobsen